Bastion v Gideon Investments Pty Ltd

Mr S Donaldson SC with Mr M J Dawson (Applicant) COUNSEL : Mr J E Marshall (Commonwealth of Australia) Mr S G Finch SC with Mr F Gleeson (amicus curiae) SOLICITORS : Tress Cox & Maddox (Applicants) CATCHWORDS : CORPORATIONS - provisional liquidation - application by provisional liquidator for approval of rescue arrangements and for directions - relevant consideration LEGISLATION CITED : Corporations Act 2001 (Cth) ss 9, 472(5), 472(6), 479(3) Bastion v Gideon Investments Pty Ltd (2000) 35 ACSR 466 Newmont Pty Ltd v Laverton Nickel NL [1978] 2 NSWLR 325 Re FAI General Insurance Co Ltd [2001] NSWSC 882 (26 September 2001) Re G B Nathan & Co Pty Ltd (1991) 24 NSWLR 674 CASES CITED : Re HIH Casually & General Insurance Ltd [2001] NSWSC 1186 (19 December 2001) Re HIH Insurance Ltd [2001] NSWSC 308 (23 April 2001) Re HIH Overseas Holdings Ltd [2001] NSWSC 426 (16 May 2001) Re PR Clark Holdings Pty Ltd (1977) 2 ACLR 416 Re Rothwells Ltd [1990] 2 Qd R 181 Registrar of Aboriginal Corporations v Bibelmen Mia Aboriginal Corporation [2001] FCA 136 (23 February 2001) DECISION : Approval and directions given

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2545/02 IN THE MATTER OF UNITED MEDICAL PROTECTION LTD (NO.3) 2543/02 IN THE MATTER OF AUSTRALASIAN MEDICAL INSURANCE LTD (NO.3) JUDGMENT (ex tempore; revised 27 May 2002) 1 HIS HONOUR: These reasons for judgment are being delivered at about 7pm on the evening of Friday 24 May 2002. They relate to applications made to me at about 4.30pm yesterday. The applications are made by Mr Lombe as provisional liquidator of the two companies United Medical Protection and Australasian Medical Insurance for an order under s 477(2B) of the Corporations Act approving arrangements he proposes to enter into with the Commonwealth and a direction under s 479(3) that he would be justified in entering into those arrangements. After a hearing that lasted until about 5.15pm yesterday, I stood the matter over to 10am today. 2 The matter is rendered urgent because Mr Lombe has taken the view that he is not in a position to make payments totalling about $40million in respect of claims made on medical indemnity insurance policies, and for discretionary support to be provided by one of the two companies in question, in the absence of the support that the Commonwealth is offering, and with the approval of the Court. It appears that the Commonwealth and Mr Lombe have been negotiating since the time of Mr Lombe's appointment as provisional liquidator of the companies on 3 May 2002. No doubt there are negotiations on other subjects, but the particular negotiations which relate to the applications before me now are negotiations following upon a statement by Senator Coonan by press release made on 30 April 2002 which was followed by another press release, this time by Senator Patterson made on 1 May 2002, the latter taking the form of an open letter to medical practitioners. Those press releases indicate that the Commonwealth will provide support described in them as a 'guarantee' in two broad areas described in paragraph 7 of this morning's reasons for judgment. What is particularly of concern at the present time is the undertaking in Senator Patterson's letter to pay 'any amount properly payable in respect of a claim in the period from 29 April to 30 June 2002 under a current or past policy.' 3 Letters of comfort written by Senator Coonan to Mr Lombe and dated 22 and 23 May 2002 respectively provide a form of indemnity to the two companies in provisional liquidation and to Mr Lombe as provisional liquidator. They are intended to give effect, provisionally, to the media releases to which I have referred. 4 As I said in this morning's reasons, since Mr Lombe wishes to have the Court's approval before entering into the arrangements with the Commonwealth and making payments, the matter is one of very considerable urgency. Some of the payees are in straitened circumstances, for although the claimants strictly are medical practitioners, the proceeds of the claim will go to patients who have successfully claimed against their doctors and in the case of some of the claims, the amounts agreed to be paid or the subject of verdicts are very substantial amounts. Everyone agrees it is unacceptable that those patients be kept out of their verdicts for any longer than is absolutely necessary. 5 There was an unexplained interval of time between 1 May 2002 when Senator Patterson's press release was issued and 22 May 2002 when the first letter of comfort was written to Mr Lombe. Clearly there was no delay on Mr Lombe's part once the letters of comfort had been received. On the date of the second of them, namely yesterday, he made his application which is as I have said, was made to me after the normal court hours at 4.30pm. Given the urgency of the matter, I gave it as high a priority as I was able to give, but as I said in this morning's reasons the issues raised by the applications are by no means easy. 6 There is a risk, in circumstances where the pressure to achieve an urgent outcome is so strong as it is in this case, that mistakes can be made. In such a case as this, there is a risk of a mistake in the nature of treating a class of unsecured creditors of the companies unfairly as compared with another class. The unfairness may arise at some future time when it emerges that some unsecured creditors receive 100 cents in the dollar while others do not, particularly if the latter category receive a lesser distribution because of largesse afforded to the former. 7 The Commonwealth's letters of comfort are intended to prevent any such outcome of unfairness from occurring. The Court is asked to approve the arrangements under the Corporations Act, and that approval is not simply a rubber-stamping. The Court has to satisfy itself, on the evidence, that the case is an appropriate one for exercising its discretion favourably. 8 In this morning's reasons, I set out a number of points which presented concern for me and stood the matter over to next Tuesday 28 May so that the matters concerning me could be addressed. I did, however, grant liberty to apply without notice so that if the matters were addressed in the meantime, it would be possible for the applicants and the Commonwealth to approach the Court for orders to be made. 9 This evening just after 5.30pm, as earlier foreshadowed by counsel, the liberty to apply was exercised, on the basis that the parties had addressed all of the issues that I had raised in my reasons handed down earlier today. One of the issues that I raised was, in effect, the lack of representation of unsecured creditors other than those who would benefit by the Commonwealth's arrangements. That was addressed this evening by the appearance of Mr Stephen Finch SC with Mr Fabian Gleeson, briefed during the course of today to represent the interests of those other creditors and to make submissions to the Court accordingly. 10 Those submissions have been received and they have been very helpful. Mr Finch canvassed the possibility that payments by the provisional liquidator pursuant to the arrangements with the Commonwealth may be unfair preferences, if at a later stage the companies are placed in liquidation and are insolvent, and (as would be almost inevitable in that event) the payments to be made at that time would be at a distribution rate (being the rate of 100 cents in the dollar) more than the rate available to the unsecured creditors in the winding up. 11 Mr Finch reminded me that the Court cannot excuse the consequences of the payment of an unfair preference by making an order, and there is no power to validate such payments. However, if the Commonwealth in accordance with its commitments tops up the distributions to other creditors in winding up to the level which would have been available to the creditors if the present payments were not made and consequently the assets representing the present payments were still with the companies, and the payees were still unsecured creditors, then in Mr Finch's submission the other creditors would not be materially disadvantaged. He concluded by informing the Court that he could see neither any adverse consequences to the remaining unsecured creditors if I make the orders sought today, or any other discretionary reasons from the point of view of creditors for declining to do so, or any other reason for declining to do so from any point of view. 12 In this morning's reasons I identified a number of matters upon which it seemed to me the Commonwealth's letters of comfort were unclear in matters of fairly basic importance. This evening counsel for the Commonwealth produced a three page document bearing today's date initialled by counsel for identification, headed 'Statement of Undertaking on behalf of the Commonwealth'. Paragraph 1 of that document says that the statement and undertaking contained in it are legally binding on the Commonwealth. Counsel for the Commonwealth told the Court that his instructions were to give the undertakings contained in that document on behalf of the Commonwealth. He informed the Court that the Australian Government solicitor had instructed him to do so on the basis that the undertakings given on behalf of the Commonwealth would be legally binding. 13 The document now bears the exhibit number AX2. Exhibit AX2 systematically works through the concerns expressed in this morning's reasons and addresses them. In doing so it alters the content of the Commonwealth's commitments in significant ways. In particular, it has the effect of making the Commonwealth's commitment correspond to the understanding of that commitment stated by Mr Lombe in his affidavit made on 23 May 2002. As I said in this morning's reasons, there were important differences between the wording of the letters of comfort and Mr Lombe's understanding expressed in his affidavit, and the effect of the Commonwealth's statement in exhibit AX2 is to confirm that Mr Lombe's understanding is correct. 14 Exhibit AX2 also makes it clear that the Commonwealth's commitment is to meet the shortfall in a winding up between what other creditors would have received but for the payments having been made and what those creditors would receive as a result of the payments having been made. The statement confirms that the Commonwealth will not lodge a proof of debt for its top-up payment if such a payment is required to be made. Where, however, in honouring its commitments, the Commonwealth makes an actual advance of funds to the provisional liquidator prior to any winding up, it regards itself as free to lodge a proof of debt as an unsecured creditor in respect of that advance and intends to do so. The statement also makes it clear that the Commonwealth will not improve the position of creditors other than those who have been under the arrangements, but will merely ensure that they are no worse off as a result of the payment. I regard those statements as a substantial clarification of the letters of comfort previously issued. 15 Perhaps the most important thing about the Commonwealth's statement is in paragraph 3 which is as follows: "If the provisional liquidator of the insurer makes payment in accordance with the letters and this statement subject to the $50 million limit referred to in the letters, the Commonwealth will ensure that creditors who do not receive payments thereunder will not be prejudiced as a result of such payments having been made". 16 That, as I understand the document, is the overarching principle upon which the arrangements are intended to operate. The specifics of the arrangements seem to me to yield to that principle. That is an important conclusion for me to make, because it is the foundation for my conclusion that the unsecured creditors of the companies other than those who will receive benefits under the arrangements will not be prejudiced by them. 17 Other matters of concern in this morning's reasons related to questions which could be answered by Mr Lombe. He has supplied a further affidavit. He acknowledges that specific payments pursuant to the arrangements will not be made by him unless he follows the procedure set out in the letter of comfort to the companies, which involves the Commonwealth giving written approval in respect of each payment after he gives a certificate to the effect that the payment is properly payable in the normal course of business. Those arrangements appear to be directed at the risk that some unusual payments, for example accelerated payments which would not otherwise arise in the ordinary course of business, might come before the Commonwealth and Mr Lombe for consideration. It is obviously not intended that the arrangements will give the Commonwealth an absolute and unfettered discretion to reject a payment which otherwise is in accordance with the arrangements. 18 Paragraph 6 of Mr Lombe's new affidavit says that "It is not correct to assume that there are no unsecured creditors whose debts become payable prior to 29 April 2002".

That responds to a statement made in my reasons delivered this morning, where I made that assumption. That statement in the affidavit gave rise to some concerns during the course of the submissions this evening. I asked counsel for Mr Lombe to indicate what quantum of debts might fall within the category of unsecured creditors whose debts became payable prior to 29 April. Before that question was answered, I asked the Commonwealth whether the arrangements it proposed would extend to cover those unsecured creditors, indicating that I was concerned that there may be some unfairness if the arrangements did not so extend. During the course of submissions I received several inconsistent answers on behalf of the Commonwealth to that question. 19 At one stage I was told that the arrangements would cover such a person, on the basis that a debt would remain properly payable after 29 April if it had become properly payable before that time. Then I was told that unsecured creditors in this category may or may not be covered but that the issue ought not to concern the Court. I made it plain that I was concerned because of a question of fairness. And then finally I was told that the arrangements did not extend to unsecured creditors in this category. (I should note that there was never any doubt that the arrangements would cover a number of specific cases identified in Confidential Exhibit AX1, where unpaid cheques were pending on 29 April 2002.) 20 That dismal outcome led me to adjourn for the parties to consider their positions. When the hearing resumed, counsel for the provisional liquidator informed me that, in effect, I need not be concerned about the issue because it was of no practical significance. He said that paragraph 6 of the affidavit was not intended by Mr Lombe to convey that there was any likelihood of there being unsecured creditors whose debts became payable prior to 29 April in the nature of insurance claimants whose debts had not been paid. Rather Mr Lombe had in mind categories of unsecured creditors set out in the annexure to the affidavit whose claims by their nature accrue over time, such as sundry creditors, claimants in respect of long service leave and the like. 21 As far as claims outstanding prior to 29 April were concerned, counsel for Mr Lombe informed me that Mr Lombe could not eliminate the possibility that there may be some undetected outstanding claims which became payable prior 29 April, but he understood that it was the policy of the companies to pay claims within 28 days and that efforts were made to bring claims payments up to date before the application for provisional liquidation was made. Therefore there may be isolated cases which may have been overlooked but as far as Mr Lombe could tell, the issue was not of any practical significance to the interim arrangements subject to the application. 22 It is on that express basis that I proceed to consider the applications. It does seem to me, however, that if there were any substantial claims which became payable prior to 29 April 2002 in the ordinary course but which have been for some administrative or other reason overlooked, there would be some real injustice in the Commonwealth not agreeing to extend its arrangements ad hoc to any such matters when identified. I make that observation not as a ground for refusing the present application but in the hope that, in evolving and difficult circumstances, sensible arrangements can be made where appropriate by way of supplement to what is now proposed. 23 Mr Lombe's affidavit also gives information with respect to other creditors along the lines requested by me. It is not easy to give an accurate estimate at this stage of the quantum of liabilities that may arise in respect of events that have occurred prior to 29 April which lead to payments becoming due after 30 June, say in the ensuing three months. But clearly in any period of three months after 30 June the total quantum of claims will be substantial. Claimants in that category are not covered by the present arrangements. 24 I do not propose, given the lateness of the hour, to review the authorities with respect to the making of orders under s 477(2B) and 479(3). Having considered the law last night, however, I am satisfied that the Court has the power to make, in the case of a provisional liquidator such as Mr Lombe, orders both under ss 477(2B) and 479(3), although the position with respect to s 479(3) is less clear than in relation to s 477(2B). 25 As to s 477 (2B) it is clear that this provision applies when a company is in provisional liquidation: s 472 (5). The principles to be applied to an application for approval under s 477 (2B) have been canvassed in many cases. Some of the more helpful in the present circumstances, to which I have had regard, are: Re Rothwells Ltd [1990] 2 Qd R 181; Newmont Pty Ltd v Laverton Nickel NL [1978] 2 NSWLR 325; Re HIH Casually & General Insurance Ltd [2001] NSWSC 1186 (19 December 2001); Re FAI General Insurance Co Ltd [2001] NSWSC 882 (26 September 2001); Re HIH Overseas Holdings Ltd [2001] NSWSC 426 (16 May 2001); Re HIH Insurance Ltd [2001] NSWSC 308 (23 April 2001); and Registrar of Aboriginal Corporations v Bibelmen Mia Aboriginal Corporation [2001] FCA 136 (23 February 2001). 26 As to directions under s 479 (3), it is not entirely clear that this section is available in the case of a provisional liquidator, as opposed to a liquidator after a winding up order has been made. The word "liquidator" is defined in s 9 of the Corporations Act to include a provisional liquidator in Chapter 7, but not generally in Chapter 5. Section 472 (6) states that the exercise by a company's provisional liquidator of his or her statutory powers is subject to the control of the Court, but it confers standing, to apply with respect to the exercise or proposed exercise of any of those powers, on a creditor or contributory or ASIC but not the provisional liquidator. However, the Court has inherent jurisdiction to provide directions to an official liquidator appointed as provisional liquidator, because an official liquidator is an officer of the Court: see Re PR Clark Holdings Pty Ltd (1977) 2 ACLR 416, 418-19; Re Rothwells Ltd [1990] 2 Qd R at 186 (quoting from Palmer's Company Precedents (17th ed, 1960) Part 2 page 103). Therefore I am satisfied that I have the power to give directions to Mr Lombe as provisional liquidator, on his application, either under s 479 (3) or in the exercise of the Court's inherent jurisdiction. Of course, directions of the kind that I shall give to Mr Lombe have the relatively limited significance described by McLelland J in Re G B Nathan & Co Pty Ltd (1991) 24 NSWLR 674; see also Bastion v Gideon Investments Pty Ltd (2000) 35 ACSR 466. 27 After so much analysis and with the assistance of the supplementary information provided this evening, which I regard as essential, I am able to conclude that the making of the orders sought in the interim applications is appropriate having regard to the interests of the companies in provisional liquidation, their members and creditors, and to the extent that the Court is permitted to take such considerations into account, the interests of the public at large. 28 The Government's arrangements were announced, as the evidence indicates, to provide some comfort to medical practitioners who are members of UMP so that they would have a measure of protection, notwithstanding the difficulties that the UMP Group had encountered, if they were to continue to practise up to 30 June 2002. 29 I cannot think of any plausible argument for saying that such arrangements would not be interests of the members of the holding company who are the medical practitioners concerned. Considering their position purely as members, it seems to me that the arrangements are at worst neutral. If the companies are wound up, the arrangements will have the effect that some unsecured creditors will have been paid and the others will be in no worse position than they would have been in if the arrangements had not been adopted. Therefore the arrangements cannot impact on the interests of members. 30 On the positive side, to the extent that the arrangements encourage medical practitioners to continue with their practices and to continue with their financial and other involvement with the UMP Group, they tend to enhance the prospects (such as they may be) that the companies in the UMP Group may be able to continue. 31 I have dealt, I hope exhaustively, with the position of the unsecured creditors, both those who receive benefits under the arrangements and those who do not. It is precisely because of the revisions made this evening to the Commonwealth's arrangements that I am able to say, in the end with some confidence, that the arrangements will not prejudice the interests of any unsecured creditors, including any claimants under insurance policies whose claims are not supported by the arrangements. 32 Finally, I have some remarks to make about the way in which this matter came before me. As I have said, the provisional liquidator acted with all due haste in bringing the applications as soon as the letters of comfort were received. I think any objective observer would acknowledge that the Court has also acted with all reasonable expedition in reaching a decision on these matters. In the course of submissions this evening, I was informed that if I did not make my decision this evening there was risk that medical practitioners would go on strike. Pressure of this kind, seeking to induce the Court to reach a decision that it would not otherwise reach on a proper consideration of all relevant facts and circumstances, is to be deplored. I do not say for a minute that counsel who informed me of that possibility, or his client, is open to criticism for that reason. I do say, however, that in any application of his kind, it is essential for the Court thoroughly to explore the issues and reach its conclusion on a measured and balanced basis without being suborned by pressure of that kind. It is a pity, looking at the events as they have unfolded, that it became necessary for the applications to be made so many weeks after the original announcements were made. But there is no evidence as to the reasons for the delay and I am prepared to assume that there were some acceptable reasons for that to occur. 33 I would certainly encourage the provisional liquidator in this case and indeed in any other case where circumstances of urgency are emerging to endeavour to keep the Court fully informed at the earliest possible time, to avoid where possible the necessity for matters to be dealt with at such an accelerated pace.

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